'Structural incentives' that attract companies to bank financing: RBI official

MUMBAI: a senior RBI Officer on Wednesday he blamed structural incentives to attract companies to Bank financing , preventing them from choosing to issue bonds.

Rajeshwar Rao, executive director of the financial market operations department, also lamented the lack of disincentives for unused working capital limits as one of the limiting factors Corporate bonds Market development

It can be noted that for the last two decades, the government, Reserve Bank and Sebi have been working on deepening the Corporate bonds markets.

The interventions initially gave some successes, but new emissions have stagnated in the last three years.

"There is inherent structural incentive for the borrowers to prefer Bank financing ," Rao said, speaking at an event organised by industry lobby here.

Rao said the newly formulated Insolvency and Bankruptcy Code (IBC) can also help the Corporate bonds market development by throwing open non-investment grade securities to the long term investors like insurance, pension and provident funds.

"We need to consider encouraging long dated Corporate bonds issuances and perhaps tax incentives could also address these issues," he said.

Rao said Corporate bonds market issuances are "good" with the outstanding increasing to over 16 per cent of GDP in FY19 as against under 5 per cent a few years ago.

However, the levels are still lower than even ASEAN countries like Malaysia, and more efforts are required, he said, adding that we need to strengthen the collaborative approach between regulators, problems and investors.

Rao especially pointed out that there should be an improvement in the selection of papers with lower ratings, which will help even medium-sized companies access them to obtain credit.

He said that the guidelines of the banking regulation department on credit enhancement can help low-rated issuers increase bonds at lower costs.

In diagnosing the problem, he said, the insurance, pension and pension fund industries have traditionally invested in highly rated bonds and have held securities until maturity without much help in developing liquidity in the markets.

Rao added that it will also be essential to clarify the structural issues, so that the bond markets become deeper and more liquid.

"A well developed Corporate bonds market complements the system in providing finance to the real sector for its long term needs. An active market also helps in diversification of risk in the financial system," he said.